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Refinancing Loan Security

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Your Tax Questions On Refinancing Loan Security Answered

Q: REFINANCING AND LOAN SECURITY

 

We are currently researching refinancing options for an investment property and owner-occupied property.

 

We have an interest-only investment loan (for full purchase price plus borrowing costs). We also have a variable, principal and interest home loan. The owner-occupied property has been used to crosscollateralise both loans.

 

We have been told that having the two properties ‘stand-alone’ is a better proposition in the long run and so a mortgage broker has suggested borrowing 80% LVR using our investment property as security, and then borrowing the shortfall with another investment loan that is secured against our owner-occupied property, as well as a separate variable owner-occupied loan with offset.

 

A: Ultimately, it does not matter which property is used as security for your loans – whether they are cross-collateralised, stand-alone or a mix of both. For example, you can use your owneroccupied home as security for an investment property loan and vice versa. The test is what the purpose of the loan is for, and if the loan is used to purchase an investment property for income-producing purposes then the interest on the loan is tax-deductible irrespective of what security is used for the loan.

 

Another example is that when you increase your investment loan for private purposes (such as a holiday or renovations to your owner-occupied home) then you are unable to claim that additional top up of that investment loan for income tax purposes. It is the purpose of the loan that determines the tax deductibility of the interest.

 

Also, if you are refinancing your loans with mixed purposes (that is, your loans may be part private and part investment) then you must keep proper records and only claim the portion of the interest that is only for investment purposes as income tax deductions.

 

– Angelo Panagopoulos
Angelo Panagopoulos - Your Tax Questions On Selling A Property And More

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-refinancing-loan-security-answered-220306.aspx

Tax Q&A – On CGT For Overseas Resident

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Your Tax Questions On CGT For Overseas Resident, Answered

Q: I am an Australian citizen but have been living in the UK since 2003 (originally on a UK working holiday visa but I’m now a dual citizen of the UK and Australia). I have been deemed a non-Australian tax resident since 2008, and am currently a UK tax resident.

 

In September 2001, I purchased an Australian (NSW) property with my sister for $352k, and we both lived in the property as our main residence. I moved to the UK in May 2003 and am currently living with my sister after she moved here sometime later.

 

We are considering selling our property (valued at $740k), and I wanted to ask what capital gains tax exemptions or concessions will be applicable? Can we claim a principal place of residence exemption for any period, given that I am no longer an Australian tax resident? Does the six-year CGT exemption apply, and if so, for which period? Can I still get a 50% discount for any period when I was an Australian citizen or resident? Do I pay the CGT tax in Australia or the UK?

 

A: This mainly depends on two things: whether you and your sister have had a principal place of residence (PPOR) in the UK since 2003, and whether you and your sister have used the Australian property for income-producing purposes while you have been living in the UK, as the capital gains tax (CGT) treatment is different for each scenario and situation.

 

Scenario 1

 

Australian property was never used for income-producing purposes and you had no other PPOR in the UK since 2003.

 

There will be no CGT applicable since this property has been your nominated PPOR and has never been used for income-producing purposes.

 

– Angelo Panagopoulos

Angelo Panagopoulos - Your Tax Questions On Selling A Property And More

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-cgt-for-overseas-resident-answered-219021.aspx

Preparing for tax time as a property investor

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Preparing for tax time as a property investor

Prepaid expenses
 
If you prepaid a rental property expense, such as insurance or interest on money borrowed, that covers a period of twelve months or less and the period ends on or before 30 June of the relevant year, you can claim an immediate deduction. Otherwise, your deduction may have to be spread over two or more years under the prepayment rules if the expense is $1,000 or more.
 
Claiming interest expenses
 
You can claim the interest charges on the loan you used to: purchase a rental property, purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property), make repairs to the rental property (for example, roof repairs due to storm damage), finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property), purchase land on which to build a rental property and interest you have pre-paid up to twelve months in advance. You cannot claim interest: you incur after you start using the rental property for private purposes, on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund), or on a loan you used to buy a new home if you do not use the new home to produce income.
 
Record keeping requirements
 
You need to keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself. You must keep records of: the rental income you receive and the deductible expenses you pay – keep these records for five years from 31 October or, if you lodge later, for five years from the date your tax return is lodged, and you also need to keep records of your ownership of the property and all the costs of purchasing/acquiring and selling/disposing of it for five years from the date you sell/dispose of your rental property.
 
Tax Variation
 
If you are expecting a large tax refund at tax time you can access the funds in your pay cycle throughout the year rather than receive the money as a lump sum annually. This also especially is beneficial for your cash flows during the year. An Income Tax Withholding Application is an annual application that your accountant can lodge to the ATO and once approved, the ATO will notify your employer of the reduced/varied amount of tax to be withheld from your pay each period. This means that your net take home pay will increase.
 

Choose the right accountant
 
Choosing an accountant who is a specialist in property tax and property investment is invaluable.
 

Tax Q&A: Your Tax Questions On Declaring Costs On An IP Turned PPOR, Answered

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Declaring costs on an IP turned PPOR


Q: I purchased a property in WA in February 2015 as an investment property. Shortly after the purchase, I moved into the property and I did not declare any costs in my 2014/15 tax return.
 
I am now in the process of moving the mortgage from an investment mortgage to homeowner to lower the interest rate. I have been advised that I can still move out of the property and keep it as a home-owned mortgage provided I don’t purchase and declare another property as my primary residence.
 
I recently received a land tax notice assessment for $426 (annual fee), which I believe is only relevant for invested land, not the primary place of residence. I would like to contact the department and declare this land as my primary place of residence, to waive this and all future fees.
 
My plan was to keep the property as an investment and potentially move back to the UK sometime this year. Once we had moved out we would claim investment property tax benefits. Does this declaration affect my opportunity to claim investment property costs after we have moved out of the property?
 
I have incurred a number of costs in purchasing and maintaining this property which I plan to declare when possible. Thank you for your advice.
 
A: You are correct to not declare or claim any costs in your 2014/15 tax return. That’s because when you initially treated the property as an investment property it was not available for rent, nor was it generating income, therefore you cannot claim any outgoings/costs as tax deductions on this basis. Of course, as this property was then your principal place of residence, you cannot claim these costs as income tax deductions either.
 
The capital gains tax (CGT) main residence exemption (that is, the six-year rule) only permits the CGT main residence exemption for a period of up to six continuous years mainly on two conditions: firstly, that you don’t nominate any other dwelling as your main residence during the period of absence of up to six years, and secondly, that the dwelling in question must have been your principal place of residence from when it was initially purchased. As this was not the case in your situation, you will not be eligible to use the six-year rule for this dwelling.
 
Your land tax notice of assessment for $426 suggests that when this property was initially an investment property (up until the time when you moved into the property afterwards) you must have had another property as your main residence; or if you didn’t, then this property may have being owned by a company or a trust, in which case land tax would apply. If you believe that neither of these factors applies to you (that is, if you believe the land tax assessment was incorrect), you can make an application to the WA revenue office for this to be reassessed and reviewed.
 
When you move to the UK, you can still own this property and use it for income-producing purposes. In this case you could still claim the relevant outgoings as income tax deductions and also be assessed on the rental income produced in your Australian income tax return every year. However, as you most likely will be a non-resident for tax purposes in Australia, you will not be able to offset any of the income tax losses in Australia against your UK income, and also, non-residents do not have a tax-free threshold on Australian-sourced taxable income.
 
Alternatively, if you do not use this property for income-producing purposes (for example, you may decide to keep the property but leave it vacant, or have it occupied rent-free), then you will not be eligible to claim the outgoings and expenses of the property as income tax deductions. If this was the case, I would encourage you to still keep all of your receipts and records, because these expenses can be capitalised and included in the capital cost base of the property, which may help reduce the CGT if you ever sell the property in the future.
 
While you are still living/occupying the property yourselves you are not entitled to claim any of the costs and outgoings for this property.
 
– Angelo Panagopoulos

 

For full article please click on the link below:

http://http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-declaring-costs-on-an-ip-turned-ppor-answered-217288.aspx

 

To Download a PDF copy click below:
Tax-QandA-May-2016

Tax Q&A: Your Tax Questions On Renting Part Of Permanent Residence Answered

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Renting part of permanent residence


Q: I’ve just purchased my first property, a three-bedroom home. I’m planning to move in and rent out the other two bedrooms. Can I claim my interest payment as a tax deduction along with other expenses for the property?

 

A: You can use your home for dual purposes simultaneously – that is, part of your home can be used as your principal place of residence and part of your home can be used for income-producing purposes as per your plans to rent out the other two rooms in the home. In addition to the other two bedrooms, you will also co-rent the other communal areas, such as the kitchen, bathroom, foyer, backyard, driveways, etc, as your tenants will most likely need to access and use these areas as well.

 

Provided that you charge an appropriate market value rental for the two bedrooms and on an arm’s length basis, you can claim the property’s outgoings, depreciation and interest expense on the loan as income tax deductions but only on an apportionment basis. Apportionment generally applies to the areas in the home that you will be using for income-producing purposes relative to the total area of the home.

 

In simple terms, if your home is 600sqm and you are using 300sqm for income-producing purposes, then you will only be entitled to claim 50% of the property’s outgoings, depreciation and interest expense on the loan as allowable income tax deductions.

 

The other factor you need to consider is the potential capital gains tax implications if you ever sell your home in the future. Assuming the property is held in your own individual name, you will not be eligible for the full capital gains tax exemption if you sell the property because you will have used part of the home for income-producing purposes. In this instance, if you ever sell your PPOR for a profit in the future, you will most likely pay some capital gains tax on part of the profit on your capital gain.

 

– Angelo Panagopoulos

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-renting-part-of-permanent-residence-answered-214079.aspx

 

To Download a PDF copy click below:
Tax-QandA-Mar-2016

Tax Q&A: Your Tax Questions On CGT Rules Answered

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Restarting a CGT-free period

 

Q: If I have exercised my exemption under the six-year rule and am now returning to stay in my unit, what is the minimum period I have to stay in my unit before I can once again rent it out under the six-year rule? This is my only principal place of residence. Your reply would be benefi cial to others in a similar situation.

 

A: Provided that you move back into your unit prior to the end of the six-year period of using your unit for income-producing purposes and then occupy your unit for a reasonable period (there is no minimum period in the Tax Act; however, it is always on a case-by case basis and must satisfy the reasonable period and intent test); and provided you can show evidence that you have in fact physically moved into and occupied your unit (for example, evidence of water/council rates, utilities, electoral roll records, etc, would generally suffice), then you will preserve your CGT-free exemption on your unit if you ever sell it in the future.

 

There is no defined minimum period in the legislation; however, as a general guide, in addition to what is a reasonable period, I would suggest a minimum of six months plus genuine intent should be OK.

 

– Angelo Panagopoulos

Angelo Panagopoulos - Your Tax Questions On Selling A Property And More

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-cgt-rules-answered-210376.aspx

To Download a PDF copy click below:
Tax-QandA-Feb-2016

Tax Q&A: Your Questions On Inheritance Tax Answered

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Capital gains tax on inherited property

 

Q: I inherited (along with my siblings) my mother’s property in March 2014, and want to know if the sale of the property would be fully CGT-free. The property was purchased post-CGT. It was used as the main residence for the whole time and earned no income. It’s currently used as my sister’s main residence; she has the right of occupancy under the will. However, the property is 65ha – so would we be entitled to a CGT exemption on the whole property or only on 2ha (including dwelling)? Is this also the case if the property is sold within two years from probate?

 

A: The main residence capital gains tax exemption generally applies for a maximum land size (including dwelling) of up to 2ha (provided the land and dwelling have not been used for income-producing purposes), and this also applies to property that has been inherited.

 

That is, if the property is sold within two years from probate, then only 2ha will be free of capital gains tax while the other 63ha will be subject to capital gains tax.You can select any 2ha which will give you the best tax outcome. Nonetheless, the remaining 63ha will be subject to capital gains tax.If the property is sold more than two years after probate, then capital gains tax will apply to the full 65ha of the property.As the property was purchased after 20 September 1985, you will also inherit from your late mother the cost base and date of when the actual property was initially purchased by her.

 

– Angelo Panagopoulos

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-questions-on-inheritance-tax-answered-210244.aspx

To Download a PDF copy click below:
Tax Q&A Your Questions On Inheritance Tax Answered

Tax Q&A: Capital Gains Tax On PPOR Turned IP

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CGT on an investment property turned permanent residence after two years

 

Q: Due to the fast-rising price of real estate in Sydney, my partner and I bought a property earlier than we had planned. We’re now renting it out until we get married in two years’ time. If we move in after two years and sell it possibly 10 years down the track, what would be our CGT obligation? What percentage of CGT would be payable? We are currently living at home with parents and will not be purchasing any other property. I would appreciate any advice you can give.

 

A: In this case, because you and your partner have used this property for income-producing purposes from the time you initially purchased the property, you will be subject to a partial capital gains tax liability if you sell the property for a profit in the future.

 

Assuming the property is held in your individual names (that is, it is not held in a company or a trust), if the initial income-producing period is two years and then after you get married you and your partner move into this property as your principal place of residence for eight years, then this is a total period of ownership of 10 years.

 

The CGT liability only applies to the period when you used the property for income-producing purposes, which was for 20% of the total ownership period.

 

Therefore, if for example the total profit of the property is $300,000 when you sell in 10 years’ time, the taxable component is $60,000 (being $300,000 at 20%).

 

As you and your partner will have held the property for more than 12 months, this will entitle you to the 50% CGT concession, which will reduce the taxable component to $30,000.

 

Assuming the property is owned in joint names and in equal shares, then you and your partner will be assessed for CGT purposes individually at $15,000 each, and the tax rates that will be applied will be at your respective individual marginal tax rates.

 

– Angelo Panagopoulos

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-capital-gains-tax-on-ppor-turned-ip-209546.aspx

To Download a PDF copy click below:
Tax QandA Nov 2015

Tax Q&A: Your Questions On Claiming Bank Charges And CGT Answered

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CGT ON RENTAL PROPERTY TURNED OWNER-OCCUPIED

 

Q: Due to the escalating price of real estate in Sydney, my partner and I purchased a property prior to when we originally intended and are now renting it out until we get married in two years’ time. I would like to enquire about the situation regarding CGT (capital gains tax) if we move in after the two years and sell it possibly 10 years down the track at a profit. What percentage of CGT would be payable? We are currently living at home with parents and will not be purchasing any other property. I would appreciate any advice you could give.

 

A: In this case, because you and your partner have used this property for income producing purposes from when you initially purchased the property, you will be subject to a partial capital gains tax liability if you sell the property for a profit in the future. Assuming the property is held in your individual names (that is, it is not held in a company or a trust), if the initial income producing period is two years and then after you get married you and your partner move into this property as your principal place of residence for eight years, then this is a total period of ownership of 10 years.

 

For capital gains tax purposes, the capital gains tax liability only applies to the period when you used the property for income producing purposes which was for 20% of the total ownership period.

 

Therefore, if for example the total profit of the property is $300,000 when you sell in 10 years’ time, the taxable component is $60,000 (being $300,000 at 20%). As you and your partner would have held the property for more than 12 months, then this will entitle you to the 50% CGT concession which will reduce the taxable component to $30,000.

 

Assuming the property is owned in joint names in equal shares then you and your partner will be assessed for capital gains tax purposes individually at $15,000 each and the tax rates that will be applied will be at your respective individual marginal tax rates.

 

– Angelo Panagopoulos

 

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-questions-on-claiming-bank-charges-and-cgt-answered-207255.aspx

To Download a PDF copy click below:
Tax QandA Oct 2015

Tax Q&A: Your Tax Questions On Property Investment Education – CGT, Answered

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Q: Here is my scenario: I have an owner-occupied property that settled in July 2015.

In September 2015 a tenancy agreement was made to rent out 75% of the property to other family members. That tenancy agreement is still in place. As of July 2016, I am still living in the property and plan to keep the tenancy structure the same for some time.

Is the CGT exemption still valid as it has still been my principal place of residence for the 12-month period? For the 2015/16 financial year is it still tax deductible based on the 75% apportioning?

 

A: For capital gains tax (CGT) purposes, the applicable date is the contract date, not the settlement date.

Assuming you purchased your principal place of residence in your individual name with a three-month settlement, the contract date would have therefore been April 2015. This is important from a CGT perspective.

To be eligible for the full CGT exemption on your principal place of residence you will need to satisfy a few criteria, with the main ones being that the property must be in your own individual name(s); must not be used for income-producing purposes; and you must not nominate any other dwelling as your principal place of residence during this period.

That is, you can’t nominate more than one dwelling at a time as your principal place of residence.

There are two elements to this question, firstly the tax deductions that you are eligible to claim, and secondly the CGT considerations.

As you are using 75% of the property for income-producing purposes, you are eligible to claim 75% of all the total outgoings of the property, which includes but is not limited to interest on the loan, council and water rates, insurance, repairs and maintenance and depreciation.

However, as you are renting your property to other family members, you must charge them rent at the full market rate, on an arm’s length basis. You must ensure that you actually receive the funds and declare this as assessable income in your tax return, otherwise the amount of tax deductions that you will be eligible to claim will be reduced to below 75% of the outgoings of the property.

In relation to CGT, for the period between April 2015 and August 2015 (being the contract date to the end of August 2015, when you weren’t using the property for income-producing purposes), you will be eligible for the full CGT exemption, therefore CGT will not apply.

However, from September 2015 until the period when your property ceases to be used for income-producing purposes (whether rented to family members or otherwise), your CGT exemption will be reduced to 25% of the capital gain if you sell the property in the future.

For example, if you sold the property and the capital gain from September 2015 was $200,000, then the taxable capital gain would be $150,000 (being 75% of $200,000), and as you have held the property for more than 12 months then you would be eligible for the 50% CGT discount concession, which would then reduce your taxable capital gain to $75,000 (being 50% of $150,000).

The actual CGT would be $75,000 added to your other overall assessable income multiplied by your marginal rate of income tax – and say this was 37% plus 2% Medicare Levy, the tax payable on this capital gain would be $29,250 (being 39% of $75,000).

– Angelo Panagopoulos
Angelo Panagopoulos - Changes to Superannuation

 

For full article please click on the link below:

http://www.yourinvestmentpropertymag.com.au/tax-questions/tax-qanda-your-tax-questions-on-property-investment-education-answered-225833.aspx

 

To Download a PDF copy click below:
Tax-QandA-OCT-2016

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